Under the Certified Public Accountant Act , the KICPA is responsible for establishing mandatory ethical requirements for Certified Public Accountants with oversight from the Financial Services Commission.
The independence requirements of Korean laws have been developed to align with the level of independence required by the 2018 version of the IESBA Code. These requirements, established by the Financial Services Commission have not been directly developed from a specific year's version of the IESBA Code. However, the Korean government has strengthened the independence requirements of the law by referring to the IESBA Code, relevant EU Directives and SEC regulations to ensure that auditor independence is equivalent to the international level.
The following key enhancements to the independence requirements which applies to all auditors.
(1) Restrictions on auditors providing Non-Assurance Services (NAS)
In 2016, the Korean government strengthened the regulation of non-assurance services (NAS) under the Korean Certified Public Accountants Act (CPA Act) to enhance auditor independence. This amendment was based on the SEC's independence regulation which the SEC regulation was the strictest among the IESBA CODE, EU and SEC regulation at that time.
And in 2018, the NAS regulations were further strengthened as part of the Korean Accounting and Audit Reform. According to the CPA Act, auditors are prohibited from providing NAS listed in the Act, regardless of whether there is a threat of self-review. Furthermore, the NAS regulations apply to audits of listed companies as well as audits of non-listed companies.
Considering these points, KICPA reports that the NAS regulations in the CPA Act are more stringent than the SEC regulation and the IESBA CODE. In addition, even if NAS is permitted, there is a requirement to obtain consent of the audit committee or consult with it in advance, which is in line with current IESBA CODE.
In practice, compliance with the NAS provisions of the CPA Act is a de facto compliance with the IESBA CODE. Therefore, most auditors refer to the NAS provisions of the CPA Act rather than the IESBA code because they are automatically compliant with the IESBA code.
(2) Prevention of Self-Review Threats
In order to eliminate the possibility of an auditor's self-review threat, in 2018, the Korean External Audit Act was amended to prohibit the auditor from being even slightly involved in the auditee's accounting and financial statement preparation process, and also prohibits the auditee from requesting the auditor to do so.
This further complements the NAS provisions of the CPA Act by prohibiting the auditee from reflecting the auditor's opinions and judgments, as well as the results of any work performed by the auditor, in the process of preparing the financial statements. This is more stringent than the IESBA CODE.
(3) Enhanced Regulation related to Financial Interests of auditors
In 2016, as required by the government, a KICPA bylaw were established to include all employees of the accounting firm, not only the audit team and partners, as “covered persons” for financial interests in the case of listed company audit engagements. As a result, all partners and employees of the accounting firm are prohibited from acquiring shares issued by the audit client in case it is a listed company.
In 2022, the government amended the KICPA Act. to bring it in line with the SEC's regulation by strengthening restriction for auditors’ loan/debtor-creditor relationships with audit clients. The amendments to the Korean Accounting Act are stricter than the current IESBA code as they prohibit practically all loan/debtor-creditor relationships between auditors and audit clients, except for mortgages, even under normal business terms between third parties.
(4) Partner rotation system
The External Audit Act mandates a rotation rule for all partners of an accounting firm, applicable to both listed and non-listed company audit clients. In addition, the time-on/cooling-off periods for partners are much stricter than the IESBA CODE:
For listed companies: 3 years of continuous audit participation / 3 years cooling-off
For non-listed companies: 5 years of continuous audit participation / 1 year cooling-off
(5) Audit team member rotation
For audit clients that are listed companies, The External Audit Act requires that if members of the audit team, who is not a partner of the accounting firm, participates in the audit for 3 consecutive years, two-thirds of such members must be replaced. This is more stringent than the IESBA CODE.
(6) Adoption of the NOCLAR Provisions of the IESBA CODE
In 2018, the key requirements of NOCLAR (Non-Compliance with Laws and Regulations) from the International Ethics Standards were incorporated into the External Audit Act, ensuring compliance with the current International Ethics Standards.
(7) Periodic designation of auditors for listed companies
In order to prevent the threat of compromising independence despite the above-mentioned strengthening of independence requirements, the government has introduced a policy and stipulated in the External Audit Act that the government designates the auditors of listed companies every six years since 2019.
While no version of the IESBA Code is stated, it is designed and aligned with the 2018 Code.
Acts Concerning Ethics
The CPA Act stipulates that no CPAs and their immediate family members shall perform an audit on entities having financial interests or having an employment relationship, in addition to the provision that no auditors shall provide their audit clients certain non-audit services.
The Act on External Audit of Stock Companies requires the mandatory rotation of audit partners.